Borders Files for Bankruptcy

Borders, the 40-year-old chain that helped define the age of the book superstore, filed for bankruptcy protection on Wednesday, a widely expected move after years of increased competition, declining sales and months of missed payments to its vendors.

Publishers, who have anticipated the bankruptcy filing for months, said they hoped that it would be a chance for the beleaguered bookseller to reinvent itself. But they were also skeptical that the company’s deep-rooted problems could be overcome.

Borders, which began in 1971 as a used-book store in Ann Arbor, Mich., will close some 200 stores and shed much of its staff. The company currently operates more than 650 stores, including about 500 superstores, and employs 19,000 people.

Publishers were told on Tuesday that Borders had secured debtor-in-possession financing and that a meeting to form a creditor committee would most likely occur next week.

The company listed $1.29 billion in debt and $1.27 billion in assets in a filing in United States Bankruptcy Court in Manhattan.

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“It has become increasingly clear that in light of the environment of curtailed customer spending, our ongoing discussions with publishers and other vendor-related parties, and the company’s lack of liquidity, Borders Group does not have the capital resources it needs to be a viable competitor and which are essential for it to move forward with its business strategy to reposition itself successfully for the long term,” Michael Edwards, the company president, said in a statement.

As of the bankruptcy filing, Borders owed $178.8 million to its vendors, including publishers, and $18.6 million to its landlords, according to another filing.

Borders said that its stores would remain open during the bankruptcy process and that its rewards program would remain in effect. The company said it would continue to honor gift cards and coupons.

At its peak, Borders was seen as the more brainy and cool of the large book chains, holding onto the college-town culture of its roots. In the 1990s, that image began to fade as the chain expanded wildly and helped snuff out many mom-and-pop independent stores.

The company’s troubles can be traced to a series of strategic missteps, executive turnover and a general failure to keep up with an evolving retail climate. Borders was hurt by pressure from Amazon.com, Barnes & Noble and big-box stores like Wal-Mart that began selling large numbers of best sellers.

Borders badly lagged behind Barnes & Noble in establishing a viable online book business, and in 2001, it linked its online store to Amazon, waiting until 2008 to restart its own e-commerce site.

Shake-ups at the top of the Borders corporate structure contributed to an overall sense of instability for the last several years, and publishers said it was difficult for the company to recruit talent to its Ann Arbor headquarters. (Barnes & Noble is based in Manhattan.) When other stores were downsizing or eliminating their music and DVD sections, Borders delayed scaling back its own.

Borders also opened stores overseas, a move that analysts said stretched the company thin.

“They overexpanded,” said Michael Norris, senior analyst with Simba Information, which provides research and advice to publishers. “They just had the mentality of, ‘If we open a new store, the growth will happen.’ ”

As e-reading began to take off, Barnes & Noble created its own signature product, the Nook, to compete against Amazon’s Kindle.

Borders tried a more comprehensive approach, stocking at least six devices in its stores, including the Kobo ($99.99), the Velocity Micro Cruz tablet ($119.99), the Sony Pocket Edition ($129.99) and the Franklin AnyBook, an audio-only reader shaped like a remote control ($59.99).

None of them have gained significant traction with consumers, compared with the more popular Kindle and Nook.

For the last five years, Borders stock has drifted downward, while the number of employees has fallen to 19,000 from 35,000.

Its sales were down more than 12 percent in the third quarter of 2010, when it reported a loss of $74.4 million. It has yet to release holiday sales data. Borders reported a total operating loss of $143.7 million in the first nine months of 2010.

In conversations with publishers last year, top executives at Borders said they were confident the troubled company could reinvent itself, even suggesting that some stores would be outfitted with wine bars to offer a more social atmosphere. The executives also said they believed there was a strong possibility that Borders could eventually merge with Barnes & Noble.

Borders has been in a crisis mode since December, when it stopped paying publishers for books shipped through the holiday season. The company asked publishers to accept i.o.u.’s for missed payments, a proposal that publishers considered but eventually rejected.

One potentially major concern is whether Borders will still receive shipments from publishers. A spokesman for the Ingram Book Group, one of the country’s biggest book distributors, said on Wednesday that the company was no longer shipping books to Borders.

Large publishers already have accepted that they will lose millions on books they shipped to Borders throughout the holidays. Wiley, for instance, has already written off $9 million in debt.

Borders said it had secured $505 million in financing from lenders led by GE Capital to keep it operating through the court process.

Last month, GE Capital had offered Borders a $550 million loan commitment, but one that was dependent on the company reaching certain milestones, including securing $125 million in junior debt. That money would have come in large part from convincing publishers to accept interest-bearing i.o.u.’s in lieu of missed payments.

The two biggest equity holders — William A. Ackman’s Pershing Square Capital Management and the Borders Group chairman and chief executive, financier Bennett S. LeBow — may suffer the most from the bankruptcy filing. Neither Mr. Ackman nor Mr. LeBow has made additional investments in Borders since the company began looking for new financing.

Last year, Mr. Ackman had proposed lending Borders up to $960 million to finance a merger of the company with its larger rival, Barnes & Noble. He still supports a deal, but only if Borders is able to shed enough underperforming stores to return to financial health, a person briefed on the matter told DealBook.

Many retailers, including Amazon.com and independents, stand to benefit from a reduction in Borders stores. And Barnes & Noble, the nation’s largest book chain, will be the biggest beneficiary from the widespread closing of Borders stores, said Peter Wahlstrom, a retail analyst with Morningstar Equity Research, who suggested that customers would move their shopping dollars to the next-closest retailer.

It also gives Barnes & Noble the chance to use its position as leverage with publishers and landlords.

“Does it provide an opportunity for Barnes & Noble to go back and fight for lower rates with their real estate owners?” Mr. Wahlstrom said. “Or, No. 2, does it provide a catalyst for Barnes & Noble to go back and get better terms from publishers and distributors?”